Forecast Remains Sunny for Florida Markets

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Forecast Remains Sunny for Florida Markets By Teresa O'Dea Hein, Senior Writer NOVEMBER 01, 2005 -- Florida markets continue to report strong activity levels, despite some concerns from nay-sayers. The hot-and some might say overheated-Miami market is the focus of much attention as it remains one of the leading real estate markets in the country today. However, there's plenty of action in the rest of the state as well, as the condo conversions trend ever upward. With thousands of people moving into the state every week, and both national and international investors buying property, activity levels remain high. In this report, we'll take a quick tour of three key Florida markets: southwest Florida (Sarasota, Bradenton, Fort Myers and Naples), Miami and Tampa. In all three, condo conversions are continuing at a heated pace, as the accompanying sidebar boxes demonstrate. SOUTHWEST FLORIDA The white-hot Miami market on which all news reports fixate has also sparked development on the other side of the state on the Gulf Coast. People fleeing the Atlantic Coast's rapid growth have headed west across the state on "Alligator Alley" (also known as Interstate 75) to settle on the Gulf Coast, reports Andy Bauman, senior advisor for Sperry Van Ness in Fort Myers, Fla. "Converters came here late in the game but are now driving the market," reports Bauman. Bauman adds that in 2001, there were five multi-family sales in all four major markets of southwest Florida. By comparison, there were 41 transactions this year as of early September. Given that construction costs continue to rise and shortages of materials like cement and steel exist, Bauman notes, "The condo conversion market makes a lot of sense because condos are already built and in place." Plus, Florida is running out of land, Bauman notes. "All of the developable land is essentially known and with the state's environmental restrictions and efforts to control growth that prevent us from developing further into interior southern sections, land prices have escalated dramatically." In fact, he adds, "Land zoned for multi-family development is now sold at twice what a developer can afford." Therefore, no new rental apartments are being developed. "Given the current economics, an apartment developer doesn't have a chance here," Bauman notes. Vacancy rates have declined to 97 to 98 percent even before the winter rental season has started. So concessions like a free first-month's rent are no longer being offered, and rents have increased five to 10 percent. In view of that, he's heard a few area complexes that have postponed their condo conversion plans. "As long as occupancy rates are high and supply is tight, they're going to continue in the rental game for a while longer." "While instinct tells you that rate of growth and steep price accelerations can't continue," Bauman concludes, "we have not dipped when the rest of the country did in the past. Instead, things may level off as the market takes a deep breath. Maybe down the road, we'll just catch our breath." In fact, since the spate of condo conversions has slashed the number of available rental units, Bauman has heard of a few properties that have postponed their conversion plans to remain, at least for the near term as snowbirds move south for the winter, in the tight rental market. Bauman also sees activity from Baby Boomers who are planning ahead for retirement by purchasing homes now. MIAMI "Miami is a difficult market to analyze because you have buyers from all over-nobody's from Miami," reports Inigo Ardid, vice president with Key International, a large Miami developer. "Most people who have a bit of wealth in Central and South America have a second home here," Ardid says. "Mexicans are huge buyers here and will continue to be. There's also been strong buying from Argentina, and the number of Brazilian customers is growing. But really we have buyers from every country." The European customer base is also very strong, adds Ardid, with buyers from Spain, Germany, Italy and Russia who all love the beach. "Most of these buyers are pretty well off-what attracts them is the weather, the views and the ocean." This developer predicts, "We'll continue to see appreciation of properties in prime locations. Basically, we're running out of good land with views and with access to the water." In Miami, land is relatively cheap, Ardid says, "so you're much better off to pay a little more and get a site that's more special, especially since the other development and construction costs are essentially similar. But there's too little supply of prime land left." Indeed, "with the ocean on one side and a swamp on the other, Miami development can only spread north and south," points out Mark Zilbert, president of Zilbert Realty Group, Miami. However, Ardid does think that a lot of projects will be very hard to get off the ground in Miami with construction costs being what they are. "You have to be careful where you build." Currently, Ardid's company is developing a gated, 45-story, 1,500-unit condo complex on a 13-acre riverfront site, complete with dockage. They're also launching a development near the beach in Sunny Isles. While the downtown Brickell Avenue area is also a good market, Ardid believes that more ordinary locations in downtown areas may have a more difficult pre-sell. Ardid also thinks condo conversions are "great opportunities to get into the Miami market because now you can't build a two-bedroom unit to sell for under $400,000." "South Florida marches to the beat of a different drummer," notes Richard Campo, chairman and CEO, Camden Property Trust, Houston. "Miami is the capital of South America." It draws on flight capital, he notes, escaping volatile Latin American economies and governments. "Miami is very hot, with the international buyers coming again," agrees Robert Sheehan, consulting economist for the National Apartment Association (NAA). Richard Swartz, managing director and principal at Sonnenblick-Goldman Co., N.Y., points out that "the market impact of changes in lifestyle demographics are hard to measure." Likewise, experts point out, the level of buyer demand from Europe and Asia is hard to predict. "Foreign buyers are looking for something special," Swartz says. "As a market weakens, you really see the better product, in terms of location and design, stand out." In the last six months, due to the prevalence of speculative buying in Miami, Swartz notes, "lenders are often asking for significant detail regarding the make-up of pre-sales buyers." Further evidence of the intense interest in real estate speculation in hot condo markets like Miami is shown by the recent introduction of two web sites for condo flipping. CondoFlip and U.S. Condo Exchange are both based in the Miami area. Building on his background in computer design and his more recent experience as a real estate broker, Zilbert launched CondoFlip.com in the Miami market in the summer of 2005 and plans to go statewide by December 2005 or January 2006. Then, his next target is Las Vegas, where he hopes to launch early in 2006, followed by other hot condo markets. Eventually, his goal is to franchise this operation. Bearing a banner headline that boldly proclaims, "Bubbles are for Bathtubs," Zilbert's patent-pending website insists that it is designed to enable buyers of pre-construction condominiums flip their contracts. And just how susceptible is a market to discussions of whether or not its bubble will burst? One astute observer asks, "Can enough pessimistic reports create a surplus of doubt, causing people to postpone or change their buying plans and become a self-fulfilling prophecy?" In the meantime, some predators are sharpening their teeth. Self-styled "vulture funds" are building capital, arming themselves for a market downturn. These include Palisades Financial, Englewood Cliffs, N.J., and a real estate analyst from Deerfield Beach, Fla., named Jack McCabe. McCabe says he expects his fund to snap up distressed condos in Florida within 12 to 15 months at the latest. TAMPA While not as aggressive as the Miami and Orlando condo markets, Tampa is still a strong area, running just behind Orlando, reports Richard Campo, chairman and CEO of Camden Property Trust, Houston. "It's not as wild as the other two but still white hot with a very good economy," Campo notes, "and there's more opportunity still in Tampa." Also known as "The Big Guava," Tampa has seen strong employment growth. However, since few of the jobs are high paying, Marcus & Millichap reports that minimal income growth, combined with elevated single-family home prices, are expected to lead to a 10 percent drop in housing affordability by year-end. This is expected to support apartment demand going into 2006. The brokerage company predicts that effective rents will grow by year-end as concessions decline. As in other markets, new construction of market-rate apartments in Tampa is reported to be limited as construction costs have soared and builders divert resources to condos. Marcus & Millichap notes that the 6,000 units purchased for condo conversion so far in 2005 are equal to more than four percent of the city's total apartment stock. As in other markets, the main condo drivers in the Tampa area are entry-level homeowners unable to afford a detached single-family residence, empty-nesters seeking to downsize and investors looking to capture quick profits. Even Donald Trump is building there, with a 52-story condo set for completion in late 2007. The 190-unit building is expected to be the tallest on Florida's Gulf Coast. Florida charts strong population growth Florida continues to be one of the most rapidly growing states in the nation. According to the 2000 Census, the 1990s was the third consecutive decade in which the Florida population grew by approximately 3 million residents. Florida's population was 15,982,378 on April 1, 2000, an increase of 3,044,307 since April 1, 1990. Its population increase trailed only California and Texas. Every county in Florida experienced an increase in population between 1990 and 2000. More than half of the state's 67 counties grew by more than 25 percent during the decade and 59 grew by more than the national growth rate of 13.2 percent. Five counties grew by more than 60 percent, including Collier County, which is home to the exclusive city of Naples, while another five grew by 40 to 60 percent. In terms of absolute population growth, the largest increases occurred in counties located in southeast Florida. Broward, Miami-Dade and Palm Beach each grew by more than 267,000 residents during the decade. Four other counties (Orange, Hillsborough (home to Tampa), Lee (home to Fort Myers) and Duval) grew by more than 100,000. More than half of the state's population growth occurred in these seven counties.

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